Economics

Ill-Timed Growth Led to Legend Homes' Fall

The president of Portland, Ore.-based Legend Homes says, half-kiddingly, that his company’s bankruptcy filing on June 10 was precipitated “by our fearless leader’s over-exuberance on land purchases.” He’s referring to the decision by David Oringdulph, Legend’s CEO, to expand his company’s market reach beyond Portland’s restrictive urban growth boundary by purchasing real estate in Washington State and California.

Unfortunately for Legend, the timing of those purchases coincided with what has turned out to be a dramatic downturn in housing demand, which in turn caused the value of Legend’s land assets to deteriorate. For example, Legend owns 175 lots in Bend, Ore., where selling homes was “highly dependent,” says Chapman, on people moving up from California, a migration that slowed to a crawl once the housing and credit markets went south. At the time it petitioned the U.S. Bankruptcy Court in Oregon for protection under Chapter 11, Legend had 362.75 acres of raw land in four states (around 100 acres of which inside a master plan called Winchester Ranch in Riverside, Calif.), 770 vacant lots, 97 completed homes and 30 other homes under construction.

The company filed bankruptcy with an estimated $258 million in assets and $198 million in liabilities. In an interview with BUILDER this week, Chapman said his company was not in default on any of its loans. However, he recounted how some large banks, acting out of what he calls “desperation,” leaned on Legend and its parent company, Matrix Development, through margin calls that can be triggered when the value of properties collateralizing those loans falls and pushes ratios below the terms of the loan contract.

“The local banks, the people we know, we’ve been able to work with,” says Chapman. Larger banks, though, have been less forgiving. He points specifically to Key Bank, from which Legend has borrowed $22.3 million. Chapman says that Key attempted to use an earlier margin call to coerce cross-collateralization. “They wanted to take 100 percent of the closings on homes they didn’t even have construction loans for,” says Chapman. “And their approach has been to reappraise the land, say ‘here’s the margin’ and then ‘please remit $9 million.’ They’ve been very difficult.”

Another problem market has been Vancouver, Wash., where Legend owns land that was part of a mixed-use master plan. The commercial developer bailed out of that deal when it couldn’t sign retail anchors for the mall, and so Legend pulled out, too, “and we got sued for specific performance” by J.P. Properties which, according one of Legend’s court filings, obtained a judgment against Matrix Development. The builder was ordered to pay J.P. $540,834. The case is still in litigation. (In a separate action, an association representing homeowners at Legend Homes’ Fountain Court townhouse/condo community in Beaverton, Ore., have filed a $7.1 million breach-of-contract suit against the builder relating to construction defect claims.)

Chapman says his company filed bankruptcy primarily “to protect our subcontractors“ which he says currently don’t have any liens filed against the builder.” (In its petition, the company lists around $1.3 million in trade debt. Chapman says that up until a month ago, “we’ve kept up our payment [with subs] and have controlled our operational expenses.”) Chapter 11 also protects the company’s ownership and its lenders, Chapman asserts. “I know they don’t like this, but we wanted to put everyone on an even playing field.”

Chapman contends that Legend’s balance sheet is in pretty good shape. Legend has downsized twice and currently employs 39 associates. “These are the people we want here,” he says. The company has between $5 million and $6 million in cash reserves it has set aside to run its business and plans to petition the court to “allow us to go back to work,” to honor its sales contracts and warranties. Legend currently has 11 projects with homes in various stages of construction and another three or four projects that don’t have anything completed yet. Chapman is still hopeful that Legend can close “a few hundred homes” in 2008.

To keep moving forward, “we need liquidity; if you don’t have funds, you’re not going to survive.” The builder will ask the court to approve debtor-in-possession financing that Chapman estimates will be between $15 million and $20 million. It’s possible the company might need to liquidate some property, although Chapman doesn’t expect that to happen. Legend has hired outside counsel (the name of which Chapman wouldn’t disclose) to help it restructure its bank and mortgage-related debt.

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